CHTR: Street Mulls Upside of a TWC Bid; Better Than TWC for CVC?

By Tiernan Ray

The Street continues to reflect upon rumors that cable operator Charter Communications (CHTR) might try to buymay try and use the company to acquire Time Warner Cable (TWC), as well as speculation that the latter is interested in acquiring Cablevision (CVC), or possibly privately held Cox Communications.

A Charter bid for Time Warner is seen as being motivated by Liberty Media (LMCA), which owns 27% of Charter, and in particular Liberty’s chairman, telecom and media deal maestro John Malone. Charter shares today are up 11 cents, or 0.6%, at $19.57.

J.P. Morgan’s Philip Cusick resumes coverage of Charter shares with an Overweight rating and a $150 price target, after a period of having been restricted on the stock. Charter buying Time Warner might not be a bad idea, and would probably involve a premium of 15% above Time Warner’s price today of $109.40:

Recent press reports have talked about Charter and Liberty Media, which recently bought 27% of Charter, interested in a merger with Time Warner Cable. With the scale of an implied 16 million subs and Tom Rutledge at the helm of the hypothetical combined entity, we believe a potential deal with TWC could provide upside for Charter – not only in cost synergies but also topline growth with Rutledge’s expertise. However, we don’t think a deal could be done without Charter paying TWC shareholders a premium for taking over control, and we would expect much of that in cash. That said, two questions still remain: 1) whether Liberty Media would want to put additional equity into Charter to prevent dilution and increase the cash component of a bid, and 2) how the financing would work given Charter’s leverage of 4.9x and Liberty’s limited cash. Based on our analysis of a hypothetical merger scenario between CHTR and TWC included in this note, we believe a bid of at least $125 could possibly be attractive enough to get TWC to the negotiating table. That represents an implied 13% premium to the current share price and less than recent premiums in the sector given the rise in TWC’s share price since the article. That deal would result in a company 5.3x levered and CHTR shareholders owning 51% of PF shares, which should allow CHTR’s NOLs to protect ~2 years of PF company taxes.

Meantime, Bryan Kraft with EvercorePartners reiterates an Overweight rating on shares of Time Warner Cable, and a $108 price target, concluding that the company would get less out of acquiring Cablevision or Cox than it would if it took a buyout offer from Charter:

We believe a TWC-Cox combination would have lower synergy value than TWC-CHTR because Cox’s programming costs are lower than CHTR’s (despite being only a slightly larger company) and because CHTR has the added benefit of accelerating the use of its tax assets. Are CVC or Cox More Attractive Options? Our 12-month PT for CVC is $8, excluding option value from consolidation. Depending on what proportion of the synergies are paid to CVC shareholders as a premium and whether or not one assumes the combined company trades at TWC’s pre-deal multiple or the companies both trade at their own standalone pre-deal multiples post-deal, we arrive at post-deal TWC stock prices in the range of $96-$105, as compared to TWC’s $96 6/12 closing price. This is below what one would expect CHTR to pay for TWC assuming typical M&A premiums, and before considering risk to CHTR’s equity currency. In our view, the greater the cash portion of any CHTR offer for TWC, the more difficult it becomes to convince TWC shareholders that acquiring CVC or Cox is a more attractive option than selling to CHTR.

Cablevision, he points out, has relatively less attractive plant than do the other operators:

We believe that CVC’s structurally lower growth rate due to its 50% FTTP overlap and its high services penetration make it an unattractive cable asset relative to other MSOs, which have modest FTTP overlap, more unpenetrated homes, and better growth prospects.

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